- Associated Press - Tuesday, May 10, 2011

NEW YORK (AP) - In buying Skype, Microsoft is getting one of the rare companies that has turned its name into a verb, like Xerox or Google. “Let’s Skype” is a phrase understandable, with slight translation, in much of the world.

For most people, it means sitting in front of your computer to talk, often for free. Four out of ten times, there are cameras involved too, turning the session into a video chat.

The service has become popular for long, rambling chats with distant friends and relatives. Children too young to talk on the phone can still be entranced by the image of Grandma on the computer screen.

Skype really is that inner circle, that inner set of social experiences,” CEO Tony Bates said Tuesday.

Skype bypasses the traditional phone system by routing calls and video over the Internet, just like email and Web pages. The calls vault effortlessly over national borders, ignoring the fences that phone companies put up in the form of international calling charges. Usernames take the place of phone numbers.

Calling from computer to computer is free. Skype charges for calls to phone numbers on the traditional phone network. It also charges for getting a phone number associated with your Skype username, so people can call you from regular phones.

Skype wasn’t the first to offer phone calls over the Internet when it launched in 2003, but the way it did it was unique and rebellious. It relied on a technology that had already disrupted the music industry _ peer-to-peer file sharing, in which computers connect to share things directly, without an intermediary vulnerable to legal action.

The founders, Niklas Zennstrom, a Swede, and Janus Friis, a Dane, had run a peer-to-peer file-sharing network called Kazaa. They sold it to an Australian company in 2002 after coming under intense legal pressure from the entertainment industry, which accused Kazaa of facilitating the theft of millions of copyright-protected songs and videos. The Australian company ended up fighting long battles in court, while Zennstrom and Friis walked away.

The pair turned their efforts instead toward applying the peer-to-peer principle to communications.

This was the genius of Skype: Thanks to peer-to-peer technology, it could get started with very little investment. The heavy lifting of running the network _ figuring out how to find users and connecting their calls _ was mostly done by the users’ computers. With very low costs, Zennstrom and Friis could afford to give the software away, feeding its popularity.

As Skype grew, eBay Inc. came calling. In 2005, it bought the company for $2.6 billion, with a plan to integrate it into its auction site.

The synergies never materialized. Skype languished under eBay, with a rapid succession of CEOs. Despite low operating costs, revenue was small; just a few percent of active users paid any money to Skype. Those who did were mostly Europeans, as they made a lot more international calls. In the U.S., state-to-state calls are already cheap.

In 2007, eBay had to write down much of Skype’s value. Two years later, eBay sold two-thirds of Skype to an investor group that included Zennstrom and Friis for roughly $2 billion.

Microsoft announced an agreement Tuesday to buy the company for $8.5 billion _ three times what eBay had valued it at. Microsoft sees in Skype a way to support its own products.

Skype still has room to grow on phones, including those running Microsoft’s Windows software.

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